2011-12-01

Gold price spiked higher Thursday morning following the news that the Federal Reserve cut the cost of emergency dollar funding for European banks

The gold price spiked higher Thursday morning following the news that the Federal Reserve cut the cost of emergency dollar funding for European banks. Gold prices climbed $25.75 to $1,748 per ounce amid a coordinated effort on the part of the world’s central banks to make dollars more easily available. The Federal Reserve, in conjunction with the European Central Bank, Bank of England, Bank of Japan, Bank of Canada, and Swiss National Bank is seeking to boost liquidity and calm fears that the sovereign debt crisis is morphing into a 2008-style financial collapse. S&P 500 stock futures climbed 34.30 to 1230.80 and oil prices moved back above $100 to $101.32 per barrel.

Analysts at Nomura later wrote in a note to clients that Yellen’s comments suggested the Bernanke-led Federal Reserve is likely to expand its set of accommodative monetary policies in the coming months. The firm cautioned, however, that it does not expect the Fed to launch QE3 at the upcoming FOMC meeting on December 13. However, Nomura did contend that “The sense of urgency in her comments suggests that a further deterioration of the sovereign debt crisis in Europe or the potential near-term tightening of fiscal policy in the U.S. could magnify the downside risks enough for the FOMC to advance the timetable for further easing…Her reiteration of concerns about ‘high levels of unemployment and underemployment’ suggest also that a further deterioration of the labor market might prompt action.”

Although Nomura did not discuss the implications of Yellen’s policy suggestions on the gold price, history indicates that they are quite positive for the yellow metal. The inherent currency debasement derived from money printing would likely continue to be bullish for the price of gold. Furthermore, there is a declining marginal utility associated with the creation of each additional dollar of fiat currency. Therefore, the Fed would need a larger quantitative easing program to generate the same amount of stimulus stemming from QE2. This fact is not lost on the price of gold, which alternatively has continued to rise on a more exponential basis each time the Fed has fired up the printing press.

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